Until the conception of the World Wide Web and commercialization of the Web browser in the mid-1990’s, the IT industry was characterized by global monopolies that dominated the technology business. Despite the amazing growth trajectory of IT in the past sixty years, there really have only been two great monopolies in the history of this business—IBM and the virtual monopoly of Microsoft and Intel.
At its peak, IBM generated 50% of the IT industry’s revenue and 66% of its profit—an astounding accomplishment that underscores the magnitude of IBM’s power in its heyday. Similarly, when IBM mistakenly handed over its monopoly to Microsoft and Intel; it created the second great monopoly– Wintel. Ironically, at its peak during the dot.com boom, the combined market value of Intel and Microsoft was around a trillion dollars or nearly 20X the total revenue of the two firms.
The Internet changed all that by leveling the playing field. Open source software, collaboration, a communication explosion and enormous data growth have shifted the balance of power in the IT industry and essentially neutered monopolies. Specifically, as the balance of power shifted from mainframes to PCs and then to the Web, switching costs declined dramatically and in the case of the Internet basically disappeared. Consider the switching costs of search or social media—there really aren’t any when compared to the costs of switching out of a monopoly platform like Wintel.
IT Doesn’t Matter? Really?
In his “brilliant” article published in a 2003 edition of the Harvard Business Review, “IT Doesn’t Matter,” Nicholas Carr argued that information technology is no longer a source of sustainable competitive advantage at the firm level—meaning IT doesn’t allow companies to differentiate in a significant way from their competitors and hence IT should be treated as a commodity. I say the article was brilliant, not because I agreed with it but rather because everybody in the industry was impacted by the prose as virtually every executive, CIO, observer, writer, economist and pundit weighed in on Carr’s premise.
In retrospect, it could be argued that Carr’s theory largely held true for the average run of the mill company with the typical IT shop. But what everyone seemed to miss is that the definition of IT consumer has changed dramatically since Carr wrote that article.
Since the inception of information technology for businesses, companies have consistently existed primarily as voracious consumers of IT. From IBM’s S/360 mainframes to the client/server movement to the consolidation of data center assets onto EMC Symmetrix, companies have spent billions building up their internal IT infrastructures for decades, only to refresh them, migrate data to new gear and repeat the process in a largely copycat world.
But there is a core fundamental shift that’s happening in the IT market that is changing the way that companies look at acquiring IT in the first place—and that change first was catalyzed by the Web and now is maturing into the cloud and big data. Specifically, what customers do with IT is now more important than what suppliers do. Said another way, more value is created by customers than suppliers—a trend that has flipped since Carr first penned his famous article.
The obvious examples are Google, Amazon, eBay, Facebook, LinkedIn, Twitter, Zynga, bit.ly and other Internet giants, including cloud service providers. To argue that these companies haven’t leveraged technology to create advantages at the firm level would be absurd. These firms emerged in the very aftermath of Carr’s article and subsequent book on the topic—essentially debunking his theory. They treat certain aspects of IT as commodity (e.g. disk drives) but protect other IT secrets (like how they exploit data) dearly. Perhaps it can be argued that these advantages are not sustainable but to me that’s like arguing the stock market will crash; eventually you’ll be right.
The Data Center as the New ATM
The bottom line is that value creation is occurring rapidly in the customer base. IT consumers are monetizing their data centers and the data contained within them. They are turning IT costs into profits by turning data centers into data factories; packaging data, information and services to be sold to other consumers.
Unlike prior IT fascinations and buzzwords of the past 20 years—cloud is a truly transformative technology. With its hyper flexibility, pay-by-the-drink premise and your-data-available-anywhere-accessibility, cloud is not only changing how companies consume IT but how they leverage IT as a strategic asset to drive incremental revenue growth.
Unlike many preceding IT trends and buzzwords—namely “green IT,” “ILM,” among many others—cloud cannot simply be achieved by rebranding one’s existing offerings. We’ve covered cloudwashing at Wikibon before and to me the lines are clear. As we’ve written in the past:
Cloud is usage-based billing, secure multi-tenancy, a large scale (i.e. billion plus) object store, support for cloud protocols (e.g. REST and SOAP), a global namespace, proven data integrity and an open set of APIs that allows easy entries and exits into and out of the platform to facilitate integration.
With such capabilities, companies can now flip their mindsets and look at their IT purchases as strategic revenue generation tools rather than bits and bytes required to run their own internal IT infrastructure.
Not Just Internet Giants
A recent case in point: Cerner, a $2B healthcare provider, recently announced that they deployed a Private Cloud Storage node from Nirvanix, which it plans to resell as a public cloud service known as Skybox Storage to healthcare institutions worldwide. From Nirvanix’s standpoint, this is a private cloud, essentially a scaled down version of its own public cloud (referred to as the Cloud Storage Network), just on a smaller scale and residing within Cerner’s own private data centers. It’s managed as a service by Nirvanix, but treated by Cerner as a public cloud from which they can generate revenue. From Cerner’s standpoint, this represents multiple Petabytes (we understand 2+) of cloud storage they can access internally and cloud storage they can sell to their specific vertical market as well.
The NYSE Euronext is another example. For years (think about the movie Trading Places) trades in the stock market were done manually, with tickets. With the advent of electronic trading, however, high-end firms upped the stakes, getting faster and faster systems in place. It meant the little guys couldn’t keep up with the giants. So the NYSE Euronext introduced its Capital Markets Community Platform, which provides a suite of trading services to clients for a fee. It’s a classic example of a large IT consumer, flipping the model and becoming a provider. Check out my interview with Fergal O’Sullivan, VP of Platform Development at NYSE Euronext, where he explains how NYSE saw the opportunity to make money from its data center infrastructure by selling its trading services to the outside world—essentially becoming a cloud service provider.
Tresata is another example of an industry-centric cloud emerging for the financial services sector. Check out my conversation with founder Abhi Mehta on The CUBE at Hadoop World. Abhi coined the phrase “Data Factory” and that’s exactly what he’s building for the FS marketplace.
These vertically-led examples, while not as high profile as a Google or Facebook represent the huge long tail of innovation that’s occurring within industries. Companies with IT prowess are seeing opportunities to sell services and package data in a way that is profitable. The center of that profit engine is information technology and trust me—IT matters, a lot.
Supporting this trend will be a new class of efficient infrastructure. For example new forms of processors such as the recent HP Moonshot announcement to bring low power mobile ARM processors to the data center. Object storage, flatter networks, new storage software architectures such as Hadoop and many others. But as this article suggests – these innovations coming from the vendor community are much less important from a value creation standpoint than the value created by customers.
Show Me the Money!
What this means going forward is that companies like Cerner and NYSE can now monetize their relationships, market position and capabilities by leveraging the IT as a service model in their respective vertical industry. This is essentially the rise of IT consumers emerging as IT providers—something you have simply not seen with prior generations of technology—and a shift we expect to take foot in other vertical markets as well.
For example, it would make perfect sense for a large-scale digital post production house to deploy a similar private cloud on its premises and make storage and applications available to smaller post houses on a pay-by-the-drink basis, thereby leveraging the latest that IT has to offer for its in-house workflow requirements and monetizing the demand in its specific market sector for capacity, bandwidth, availability and specialized applications to be available on the fly and whenever needed.
The key point is that vertical relationships and focus combined with the latest IT as a service advancements position companies to serve their own respective industry far better than anyone else with a horizontal general purpose focus. A key aspect of that premise is data about the industry becomes a key ingredient to success.
What this means for technology execs is that in the near future, CIOs will evolve to an internal advisory role whereby they recommend specific cloud services to different business units. Think about it—rather than deal with the pain and hassle of procuring physical storage systems for each business unit, imagine a world where CIOs can prescribe different public clouds for different business needs; different SLAs for different types of data. You could have Amazon S3 for the developers; Nirvanix for the large unstructured corporate data sets and Box.net for non-business-critical general purpose files. Taking this one step further, when CIOs have multiple (private) clouds running within their own data centers, they can place different business unit data on different clouds of their own—and sell access to these clouds within their specific industry.
CIOs will be expected to orchestrate fully fleshed out monetization strategies based on the IT products and services they consume in the years ahead. It won’t be good enough to say “this is what we need to get the job done,” when trying to justify an IT purchase—now CIOs will have to answer the question of “is this what we need to fulfill our internal requirements and to serve as a platform for external revenue generation?” In other words getting two services and two sets of ROI and IRR will be critical for CIOs to stay relevant and influential within the ever-changing IT environments of global companies.
IT. Vertical. Cloud. Data monetization. Consumers becoming providers. It’s happening. Right now.